19Jun15

ECB staves off collapse of Greek banking system with emergency funding

The European Central Bank provided just enough support on Friday to stave off
the collapse of the Greek banking system as political and financial pressure was
piled on Athens before a crisis summit of eurozone leaders on Monday.

With more than €1bn (£715m) leaving Greek banks on Friday alone, the ECB
provided €1.8bn in emergency funding to keep the system operating over the
weekend and said it would meet again on Monday to decide whether to provide
further help.

The ECB's tough line came as a succession of European politicians demanded the
Greek government of Alexis Tsipras come up with proposals that would prevent
Greece's default and its possible exit from the single currency.

European commission sources said a meeting of finance ministers - to be held
hours before the leaders' summit - would discuss plans for managing Greece's
exit from the single currency.

Far from buckling, the Greek prime minister put on a show of defiance on Friday
during a visit to Russia, where he made a pitch for support from Vladimir Putin.
"We are ready to go to new seas to reach new safe ports," Tsipras said.

Russia's deputy prime minister Arkady Dvorkovich had hinted that Russia would
consider a loan to Greece. "The most important things for us are investment
projects and trade with Greece. If financial support is needed, we will consider
this question," he said in an interview on RT television.

Since Tsipras became head of the leftwing Syriza-led coalition five months ago,
he has said the Greek debt crisis will be solved by the eurozone's political leaders
rather than its finance ministers.

Speaking in St Petersburg, he expressed confidence that a deal would be done.
"All those who are betting on crisis and terror scenarios will be proven wrong,"
Tsipras said.

Failure to end the stalemate between Greece and its creditors at a meeting of
eurozone finance ministers on Thursday led to fresh Greek deposit withdrawals,
bringing the total for the week to €4.2bn.

Greek bank shares have lost almost a third of their value since the end of May,
as Athens and its creditors - the International Monetary Fund, the ECB and the
European commission - maintain a standoff over €7.2bn in bailout funds that
Greece needs in order to meet a €1.6bn payment to the IMF by 30 June.

The support from the ECB meant no queues outside Greek banks on Friday, but
a European commission vice-president said the assistance was only temporary
measure.

Speaking in Luxembourg at a meeting of EU finance ministers, Valdis
Dombrovskis said: "It is very clear that to regain financial stability a clear
agreement is needed on the programme, and a credible strategy needs to be
presented by the Greek authorities showing how they will regain financial
stability and economic growth."

The British chancellor, George Osborne, said Tsipras should do a deal before it
was too late, and that Europe should start preparing for the worst.

"We have entered the eleventh hour of this Greek crisis and we urge the Greek
government to do a deal before it is too late. We hope for the best, but we now
must be prepared for the worst," Osborne said on Friday outside the
Luxembourg gathering.

Donald Tusk, Poland's prime minister and president of the European council,
said: "We are close to the point where the Greek government will have to chose
between accepting what I believe is a good offer of continuing support, or head
towards default. At the end of the day it can only be a Greek decision and a
Greek responsibility."

"The game of chicken needs to end and so does the blame game," he said.

European commission sources stressed that for the Eurogroup of finance
ministers or the leaders' summit to consider a compromise, Greece would first
need to submit new proposals on contentious issues such as pension reform and
a widening of the tax base for VAT.

Tsipras has insisted that making pensions less generous or raising VAT would
cross his government's "red line" and would push Greece even deeper into
recession. Athens wants its creditors to agree to a debt swap that would help it
reduce its budget deficit without any additional economic pain.

The creditors argue that without such reforms, Greece will not be able to be
financially independent, but they were uncertain on Friday night as to whether
Athens would table anything new at the meetings on Monday.

"If there are no new proposals from Greece to discuss, the ministers are likely to
instead talk about how to handle Greece's default," one eurozone official said.

The IMF's managing director, Christine Lagarde, has insisted that Athens will be
given no leeway over the 30 June deadline for the €1.6bn payment.

Failure at Monday's talks would intensify the outflow from Greek banks and
increase the chances of capital controls being imposed.

Tsipras has also come under pressure from political opponents at home. Anna
Asimakopoulou, a shadow finance minister with the New Democracy party, said:
"There is a bad scenario and a worst-case scenario. Either Tsipras agrees to take
austerity measures worth €5bn, because that is what the Europeans are asking,
or he takes Greece out of the eurozone And the problem is this. He doesn't have
a mandate for either."

Jonathan Loynes, the chief European economist at the consultancy Capital
Economics, said: "The failure to reach a deal at last week's Eurogroup meeting
and the rapid outflow of deposits from Greek banks suggest that a near-term
eurozone exit may now be more likely than not.

"We do not buy the view that Greece would slip out of the eurozone without a
ripple. Should it become clear that a major default and exit are indeed coming
soon, we will pull down our projections for growth across the rest of the
eurozone this year and next, possibly to predict a renewed recession."

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